As we saw in earlier chapters, a nation’s culture, history, and current events cause differences in attitudes toward trade and investment. Some governments take a strong nationalistic stance, whereas others are quite receptive to international trade and investment. A government’s attitude toward trade and investment is reflected in the quantity and types of restrictions it places on imports, exports, and investment in its country.
Government regulations can quickly eliminate a market or site from further consideration. First of all, they can create investment barriers to ensure domestic control of a company or industry. One way in which a government can accomplish this is by imposing investment rules on matters such as business ownership—for example, forcing foreign companies into joint ventures. Governments can extend investment rules to bar international companies entirely from competing in certain sectors of the domestic economy. The practice is usually defended as a matter of national security. Economic sectors commonly declared off-limits include television and radio broadcasting, automobile manufacturing, aircraft manufacturing, energy exploration, military-equipment manufacturing, and iron and steel production. Such industries are protected either because they are culturally important, are engines for economic growth, or are essential to any potential war effort. Host governments often fear that losing control in these economic sectors means placing their fate in the hands of international companies.
Second, governments can restrict international companies from freely removing profits earned in the nation. This policy can force a company to hold cash in the host country or to reinvest it in new projects there. Such policies are normally rooted in the inability of the host-country government to earn the foreign exchange needed to pay for badly needed imports. For instance, Chinese subsidiaries of multinational companies must convert the local currency (renminbi) to their home currency when remitting profits back to the parent company. Multinationals can satisfy this stipulation only as long as the Chinese government agrees to provide it with the needed home-country currency.
Third, governments can impose very strict environmental regulations. In most industrial countries, factories that produce industrial chemicals as their main output or as byproducts must adhere to strict pollution standards. Regulations typically demand the installation of expensive pollution-control devices and close monitoring of nearby air, water, and soil quality. While protecting the environment, such regulations also increase short-term production costs. Many developing and emerging markets have far less strict environmental regulations. Regrettably, some companies are alleged to have moved production of toxic materials to emerging markets to take advantage of lax environmental regulations and, in turn, lower production costs. Although such behavior is roundly criticized as highly unethical, it will occur less often as nations continue cooperating to formulate common environmental protection policies.
Finally, governments can also require that companies divulge certain information. Coca-Cola actually left India when the government demanded that it disclose its secret Coke formula as a requirement for doing business there. Coca-Cola returned only after the Indian government dropped its demand.